Chapter 13

Learning Objectives (part 1 of 3)

Describe the two major philosophies of investing and the investment implications of each

Describe the features of a bond Distinguish between agency, corporate,

and municipal bonds Describe how a bond call works and why

it is bad for the investor Discuss the various bond ratings and

rating agencies

Learning Objectives (part 2 of 3)

Compute the price of a bond Compute the yield to maturity of a

bond Discuss how accrued interest is

processed on bond trades Explain the relationship between

coupon yield, current yield, and yield to maturity, and indicate which one an investor should use and when

Learning Objectives (part 3 of 3)

Describe what a duration statistic is Describe how zero-coupon bonds and

convertible bonds work Explain how to get a quick reading on

what the bond markets are doing Describe some of the strategies to

use when investing in bonds

Philosophies of Investing (1 of 2) Inefficient Market Hypothesis

A bright person can identify undervalued stocks

One should spend tons of time doing personal research

Assumes most other people are stupid or an anxious to lose their money

Philosophies of Investing (2 of 2) Efficient Market Hypothesis

Stocks are fairly priced to reflect their risk and expected return

Select stocks based on fit with the portfolio

Assumes most other people are reasonably bright and are trying to make money

Features of a bond Par or maturity value Maturity Date Coupon Rate Trustee Indenture A loan to the issuer of the bond

Issuers of bonds Government

Issued by the U.S. Treasury Agencies

Issued by an agency of the U.S. Government

Municipals Issued by any government entity

other than the federal government

Corporate Bonds May be classified by collateral

Debentures Mortgage bonds Collateral Trust bonds

May be classified by special features Convertibles Zero coupon Baby bonds

Indemnity Policies Do not explicitly cover medical

expenses Pay a fixed dollar rate per day

under specified conditions Examples:

a hospital indemnity policy pays a per diem while in hospital

Specific disease policy

Managed Care Three types of plans

Health Maintenance Organization (HMO) Preferred Provider Organization (PPO) Point-of-Service Plans (POSs)

Two types of HMOs Exclusive HMO (primary care physician) Individual practice HMO (IPA-HMO)

PPO vs. POS Plans PPO is a fee-for-service plan

Patient limited to providers in the PPO’s network

POS provides a primary care physician

Medicare Part of Social Security Benefits Six choices for participation

Original Medicare Plan (OMP) OMP with a Supplemental Insurance Policy Medicare Managed Care Plan Private Fee-for-Service Plan Medicare Medical Savings Account Plan (MSA) Religious Fraternal Benefit Society Plan (RFB)

Original Medicare Plan Part A: Hospital Insurance

Enrollment automatic if entitled to Social Security benefits

Part B: Medical Insurance Individuals must enroll Premium is paid as a reduction in Social

Security benefit Many gaps in Medicare coverage (even

with both parts)

Covering Medicare’s Gaps Retirees should have one or more

of the following policies: Medicare Managed Care Medicare Select Medicaid Medigap Retiree health benefits Long-term care insurance

Medicare Managed Care Plans HMOs for people entitled to Medicare,

four different organizational structures Health Maintenance Organization (HMO) HMO's with Point of Service Option (POS) Provider sponsored Organization (PSO) Preferred Provider Organization (PPO)

Medicaid Jointly funded, Federal-State health

insurance program for specified low-income and needy people

Originally for people eligible for Aid to Families with Dependent Children (AFDC)

Rules vary among states

Long-Term Care Insurance (1 of 2) Covers cost of living in a nursing

home Key elements of a policy

Elimination peroid Maximum lifetime benefit Cost-of-living adjustment (COLA)

Cheaper when younger, but not everyone will need the benefits

Long-Term Care Insurance (2 of 2) Key features to look for in a policy

Make sure daily benefit adequate to cover daily cost in a nursing home

Annual inflation rider (COLA) Make sure benefits last at least 3 years Generous definition of qualification for

nursing home admission Renewable for life & waiver of premiums

Disability Income Insurance At least as important as life insurance Key elements of a policy

Replacement ratio (upper limit 50% to 70%)

Elimination period (2 weeks to 6 months) Duration of benefits (2 years to age 65) Residual rider Guaranteed future insurability

Alternatives to disability income insurance Social Security disability income

Available only to covered workers Six months elimination period Strict rules on definition of disability

Worker’s Compensation Injury will not necessarily occur at

work Even if it does, several exceptions to

quality for coverage